Customer payments

3 ways to record Paypal, Stripe, or Credit Card processing fees
There are three main ways of recording payment processing fees from Paypal, Stripe and the like. Firstly as a reduction of sales, or a "contra-sale", secondly as a cost of sale or finally as an ordinary expense.
Wayne Merry
November 11, 2019

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Your online customers can’t pay you cash. You need to receive payments through some online mechanism. Your choices include Paypal, Stripe or using a payment gateway. No matter which method you choose, you will incur processing fees. How should you record these processing fees?

Method 1: Record Processing Fees Against sales (contra-sale)

This method treats the costs of your payment provider as a reduction in your sales revenue. By way of example, if you sold items for $100 and your fees were $3.20, then you report $96.80 sales revenue. $96.80 is what you will receive, so it can make sense to record that.

Unfortunately, it is not that easy. Tax authorities will consider that you have $100 of revenue and $3.20 of costs. It is true that the cost is likely to be deductible against your income. Most tax authorities require that you report income and deductibles separately.

The situation is different than a discount given. If you would have charged $120, but gave the customer a $20 discount to make the sales price $100, you have only $100 revenue. The $20 discount is money that you were never entitled to.

Designing your sales accounts

  • You can use a series of header accounts. Header accounts allow you to place, or “nest” child accounts inside.
    • Most accounting systems, including Uwazi accounting, allow you to have multiple levels of header and child accounts.
  • Record your gross sales in a dedicated sales account. If you need to distinguish between different types of sales in your financial statements, you can use more than one sales account, grouped under a header account called “Gross sales”
  • Use a second sales account for genuine “contra-sales” such as discounts given or allowances. These are a kind of negative sale, or in accounting speak, debits.
    • If you need to distinguish between different types of discounts or allowances, then you can use more than one account for these, grouped by a header account. Keep in mind, however, that the more you do this, the longer your financial reports.
  • Use a third sales account for your payment provider processing fees. These will be a negative sale or debit.

Your profit and loss statement will total all of your sales accounts. The total of sales reported will be net of your payment provider costs.

Considerations when recording processing fees as contra-sales

If you do not collect payment surcharges, this method may not be as suitable as the two alternatives below. This method also has a downside. Generally ratios that incorporate sales presume that there is no netting of sales revenue with any direct costs. Introducing direct costs as a “contra-sale” will distort this analysis. This is particularity the case if you compare your ratios with other businesses.

Tax authorities will generally require you to report the first and second account as your sales. You’ll need to add back payment provider costs to arrive at total revenue for tax purposes. You will generally be able to claim your payment provider processing fees elsewhere on your tax return/report.

Contactless payment devices will create processing fees

Method 2: Record Processing Fees as Cost of Sales

If you use this method, then you record your processing fees as a cost of sale.

Cost of sales are any costs that are directly associated with:

  1. the sale itself
  2. the product sold

The second category is known as cost of goods sold. Cost of sales includes both cost of goods sold and costs associated with the sale itself. Processing fees are associated with the sale itself.

Using an accounting system such as Uwazi accounting, create two header accounts called “Direct Cost of Sales” and “Cost of Goods Sold”. You can then use a child account underneath “Direct Cost of Sales” to record processing fees. If you have other direct sales costs, you can record them in other child accounts. By setting your accounts up in this way, you will keep any cost of goods sold separate from processing fees.

Method 3: Record Processing Fees as Expenses

This method is considered the traditional approach. You can think of payment provider costs as like collection staff payroll costs. This means that instead of employing people, you have employed an agency to collect payments for you. This implies that costs associated with payment collections by someone else should be treated like costs if your organization did it.

To use this method, you create an account under the expense section in your accounting system. If using Uwazi accounting, you can tag the account as a variable cost account.

What are variable costs?

Costs can be classified as fixed or variable:

  • Fixed costs are those that you incur regardless of your sales
  • Variable costs vary with your sales. A cost that is percentage of a sale is a variable cost


We have considered three methods that you can record processing fees:

  • You can record these fees as a reduction of sales, or a “contra-sale”. This provides a direct comparison of processing surcharges against processing fees. It also results in it being more difficult to report to tax authorities and can distort sales ratios
  • Secondly, you can record these fees as a cost of sale. As these costs are directly related to sales, this is a clean approach
  • Finally, you can record these fees as an ordinary expense. This is the traditional approach. Some prefer this approach because these costs can be seen as an alternative to in house staff costs involved in payment collections.

How do you record processing fees? Feel free to share in the comments below.


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